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Business

Brazil's Government Seeks Constitutional Change to Curb Public Spending

New government under pressure to turn around economy as finance minister says temporary tax increases are possible

Brazilian Finance Minister Meirelles speaks to the audience during a meeting with journalist and businessmen in São Paulo, photo: Reuters/Nacho Doce
By Reuters Whatsapp Twitter Facebook Share
2 years ago

BRASILIA — Brazil’s interim President Michel Temer said on Tuesday he would seek a constitutional amendment to curb public spending as his government unveiled a raft of austerity measures to reduce a record fiscal deficit and regain investor confidence.

Brazil's interim President Michel Temer reacts during a meeting of the presentation of economic measures, at the Planalto Palace in Brasilia, Brazil. Photo: Reuters/Adriano Machado

Brazil’s interim President Michel Temer reacts during a meeting of the presentation of economic measures, at the Planalto Palace in Brasilia, Brazil. Photo: Reuters/Adriano Machado

Temer, a centrist who took over from leftist President Dilma Rousseff two weeks ago after she was suspended pending an impeachment trial, told congressional leaders that the amendment would limit growth in primary government spending before debt payments to the rate of inflation from the previous year.

He said the move would be the best way to bring down high interest rates, recover the country’s credit standing and jump-start economic growth amid the deepest Brazilian recession in decades.

Brazil lost its coveted investment grade rating in December and the central bank’s benchmark interest rate rose to 14.25 percent as deficit spending by the government sent inflation surging into double digits last year.

Temer, who was vice president under Rousseff, said a vote in Congress on Tuesday on the 2016 fiscal target was the first test for his government as it tries to balance its overdrawn accounts. The deficit is on track to top 10 percent of gross domestic product for a second straight year.

Finance Minister Henrique Meirelles, a former central bank governor heading Temer’s economic team, said the reforms that will be sent to Congress in two weeks are aimed at securing the state’s future solvency.

One proposal involves an agreement with the state development bank BNDES for the early repayment of 100 billion reais ($28 billion) owed to the Treasury, Temer added.

The constitutional amendment will also propose changes aimed at reducing the growth rate of mandatory health and education spending, Meirelles said at a news conference. He added that there would be a review of government subsidies and tax breaks, and said taxes could be raised temporarily.

A constitutional amendment would require 60 percent support in both chambers of Congress. More than two-thirds of the Senate and lower house backed the impeachment process against Rousseff, whose popularity plummeted in step with the economic crisis.

Unpopular spending caps and tax increases, coming on top of a recent rise in unemployment and weak consumer and business confidence, could pose a serious challenge to Temer’s fragile ruling coalition.

PENSION CHANGES

Brazil’s currency and benchmark Bovespa stock index both gained slightly on Tuesday, signaling investors were not overly optimistic that Temer’s plan would lead to a quick economic recovery.

Brazil's Finance Minister Henrique Meirelles gestures during a news conference after presentation of economic measures, at the Planalto Palace in Brasilia, Brazil. Photo: Reuters/Adriano Machado

Brazil’s Finance Minister Henrique Meirelles gestures during a news conference after presentation of economic measures, at the Planalto Palace in Brasilia, Brazil. Photo: Reuters/Adriano Machado

Markets have generally warmed to Temer’s government, which has vowed to pursue a more business-friendly program than the Rousseff administration, but the departure of a key minister on Monday showed the political challenges he faces.

Some economists said the new proposals were a move in the right direction but not enough to bring the deficit under control.

“The government has to announce measures that have effect by the end of the year and really increase revenues, or else they will lose (investors’) confidence,” said Alex Agostini, the chief economist at São Paulo-based Austin Rating.

“They cannot get away from raising taxes, and they have to make clear that they will reform the pension system to control the deficit,” Agostini said.

The repayment by BNDES, starting with an immediate transfer of 40 billion reais, will save the government seven billion reais a year, Temer said.

His government is examining the legality of the BNDES move after Rousseff was put on trial by the Senate for allegedly using money from the state bank to boost spending during her successful 2014 reelection campaign.

Temer said reforming Brazil’s generous pension system, a major factor in its fiscal crisis, will be undertaken with the agreement of Brazilians. Labor unions have strongly opposed changes that would reduce benefits.

Brazil also plans to extinguish its sovereign wealth fund and create rigid technical rules for executives running pension funds and state companies, he said.

The government is also considering whether the state-run oil company Petrobras should be required to hold a stake in Brazil’s vast deepwater subsalt oil reserves, Temer said.

ALONSO SOTO
SILVIO CASCIONE

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